Tax receipts plunge, next CT budget $300M in deficit

Plummeting tax receipts have ripped a nearly $300 million hole in the next state budget, leaving legislators and Gov. Dannel P. Malloy just one week to fix it, according to a new report Wednesday from fiscal analysts.

Meanwhile, proposed new spending for pre-kindergarten programs, the elderly and working poor, public colleges and universities, and for cities and towns hang in the balance – as do tax breaks for teachers and consumers and the potential expansion of legalized gambling in Connecticut.

New projections from the administration and the legislature’s nonpartisan Office of Fiscal Analysis also worsened the deficit in the first budget after the November election, pushing it close to $1.4 billion or 7.4 percent of annual operating costs.

Meanwhile, the $500 million-plus surplus Malloy touted just two months ago when he proposed a tax rebate has disintegrated to $43 million.

Also Read

Mental health and substance abuse treatment providers say they're planning to limit access to programs if a proposed $25.5 million cut to grant funding goes through. A recent analysis by the state Department of Mental Health and Addiction Services says even with more insured clients, the providers will only be able to make up a fraction of the proposed grant cuts. But the governor's budget director said funding those grants is "a luxury that we can’t afford right now."

The Senate Democratic majority's leadership yielded Monday to a toothless compromise on the question of capping the unlimited expenditures the state parties now can make on General Assembly races in Connecticut. The compromise: a $250,000 cap that wouldn't have meant a difference in any campaign last year.

Combined with the $271 million already in the emergency reserve, that surplus leaves the Democratic governor with a fiscal cushion of less than 2 percent against a post-election deficit more than four times its size as he enters his re-election campaign.

Still, the Malloy administration insisted it was prepared to deal with the bad news.

"At the end of the day, we will have a balanced budget and it will reflect our priorities," Mark Ojakian, the governor's chief of staff, said.

But Republican legislative leaders said the disappointing revenues that have plagued state finances since the last recession stem, in large part, from the $1.5 billion tax hike Malloy signed three years ago to close the historic budget deficit he inherited.

Senate Minority Leader John P. McKinney, R-Fairfield, who is running for governor, said administration officials were overly optimistic projecting tax receipts in January to bolster the governor's image entering an election year.

"Connecticut's economy and revenues are crumbling," he said. "It's time to get serious."

Barnes responded that the January revenues also were endorsed by nonpartisan analysts.

"It's a lot easier to heckle from the sidelines than do the hard work," Ojakian said.

Nonpartisan analysts began warning two weeks ago that income tax receipts were running well below projections. Taxes tied to capital gains and other investment-related earnings in particular came up short.

But the new report also lowered expectations for sales and corporation tax receipts.

Revenue loss hits new budget the hardest

The biggest impact of Wednesday’s report involves the next state budget, which begins in less than nine weeks.

Malloy recommended a $19.03 billion plan in February, adding a modest $37.2 million to the preliminary 2014-15 budget adopted last spring. Most of those new dollars went into pre-kindergarten programs, rental subsidies for low-income seniors, an extra $8 million in municipal aid and additional supportive housing for people with mental illness.

The governor also recommended a two-tiered income tax exemption for retired teachers living in Connecticut that would be retroactive to Jan. 1.

Malloy’s plan also retained several tax changes built into the preliminary 2014-15 budget including:

The first step of a two-step effort to reverse a tax hike on Connecticut’s working poor. The state’s Earned Income Tax Credit was reduced in the current budget from 30 percent to 25 percent of the EITC. That state credit was supposed to rise to 27.5 percent of the federal one in 2014-15, and reach 30 percent in 2015-16.

Restoration of the sales tax exemption on clothing and footwear costing less than $50. This is supposed to happen in June 2015, the last month of the new budget.

And allowing for the launch of keno, an electronic lottery-like game, in hundreds of restaurants and bars, later this year.

A few questions were raised in late March about the stability of Malloy’s plan, though, when the legislature’s Office of Fiscal Analysis concluded it was almost $70 million out of balance, largely because it failed to budget for contractually required retirement benefits for unionized prison guards.

Combining that $69.4 million shortfall in the governor’s February proposal with new revenue projections for 2014-15, put the Malloy plan more than $300 million out of balance.

'Everything is on the table'

"All of the revenue and expenditure items (in the governor's budget) are uncertain" now that revenues are down, Barnes said.

"Everything is on the table," Ojakian added.

From left, Senate Minority Leader, and gubernatorial candidate, John McKinney, R-Fairfield, and House Minority Leader Lawrence Cafero of Norwalk.

House Minority Leader Lawrence Cafero, R-Norwalk, and McKinney said the Republican minorities in the House and Senate would develop their own plan over the next week to close the deficit in the next budget through spending cuts alone.

The 2014 legislative session ends May 7.

The GOP leaders added they think most Democrats in both chambers oppose legalizing keno, and that the initiative is being driven exclusively by Malloy, and by his fellow Democrats in top legislative leadership posts.

Cafero and McKinney said they may not be able to stop keno's legalization, but they at least can force all legislators to go on public record on the issue. Republicans have attached amendments to prohibit keno to a host of Democratic-sponsored bills.

"If they don't get rid of keno, they own it," McKinney said.

The legislature’s Appropriations and Finance, Revenue & Bonding committees’ spending and tax plans for 2014-15 also were left in poor shape by the latest revenue projections.

The $19.04 billion spending plan the Appropriations panel endorsed for 2014-15 is now $282 million in deficit, based on the new projections. And that plan used this year’s surplus dollars to plug the $70 million deficit in the governor’s proposal.

The Appropriations Committee also added funds for support programs for the mentally ill.

The finance committee backed all of major tax changes proposed by the governor, and also recommended retaining keno and sending revenues from the game to cities and towns.

More About

The unemployment rate in Connecticut was 6.4 percent in February, a tenth of a point higher than the previous month as the state added both jobs and job seekers, the state Department of Labor said Thursday. “Connecticut’s record cold February temperatures and frequent snow appears to have affected industry employment, hours worked, and some unemployment claims activity last month,” said Andy Condon, director of the Office of Research.

The Senate Democratic majority's leadership yielded Monday to a toothless compromise on the question of capping the unlimited expenditures the state parties now can make on General Assembly races in Connecticut. The compromise: a $250,000 cap that wouldn't have meant a difference in any campaign last year.

Leaders of the legislature's Republican minority condemned Gov. Dannel P. Malloy’s proposed budget Thursday as savaging the social safety net, but they declined to commit to offering their own alternative to the one by the Democratic administration. Zingers ensued.

Nonpartisan fiscal analysts again asserted Wednesday that the current state budget deficit is worse than Gov. Dannel P. Malloy’s administration has reported — and that’s despite a recent administration estimate that more than doubled the shortfall. And while the Office of Fiscal Analysis was issuing its $191 million deficit forecast, Malloy’s budget chief directed all agencies Wednesday to brace for a third round of emergency cuts and to ensure spending is “significantly curtailed” between now and the fiscal year’s close on June 30.

Much of Tom Foley’s last-minute proposal to cut taxes on Social Security benefits already is covered in existing state law. And the GOP gubernatorial nominee’s overall tax relief proposal on retirement benefits would expand Connecticut’s post-election deficit by roughly $100 million next fiscal year.

For almost a quarter of a century the state has depended on private nonprofit organizations to provide services to people with disabilities in Connecticut. This includes services to people with intellectual and developmental disabilities, mental illness and addictions. For over two decades, the average increase to the contracts with these providers has been less than one percent per year.

yale – ad

Words to Give By

In Case You Missed It

Does your organization want to connect with The Mirror brand during the 2015 legislative session? Our media kit is available here with new sponsorship opportunities and ad placements that will carry your organization through the key public policy season in Connecticut and beyond.